Accrued expenses & Accrued Liabilities. Financial Accounting

In this video, we explain accrued expenses and accrued liabilities
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0:00 Introduction
Introduction (0:00-1:41): The video introduces accrued expenses as costs that have occurred but haven't been paid or recorded, using the analogy of library late fees.
Explanation of Accrued Expenses (1:41-6:33): Accrued expenses are costs a company has incurred but not yet paid or recorded on their financial statements. An example is given using rent expense (2:13).
Examples of Accrued Expenses (5:19-6:33): Common examples include salaries and wages, interest on loans, utilities consumed, and taxes owed.
Accrued Salary Example (6:33-9:48): A detailed example is provided, where employees are paid every Friday, but the year ends on a Wednesday (7:37).
Journal Entry on Payment Date (9:48-11:26): The video explains what journal entries to make when the salaries are paid (10:05), and how to account for expenses from the prior year.
Multiple Choice Question (11:26-13:59): The video goes through a multiple choice question about a company incurring a utility expense in December but receiving the bill in January (11:32).




Understanding Accrued Expenses and Accrued Liabilities
Accrued expenses and accrued liabilities are concepts in accounting that represent expenses that have been incurred but not yet paid, nor have the transactions been recorded by the end of the accounting period. These are essential for ensuring that an entity's financial statements accurately reflect all of its obligations and expenses as of the reporting date, according to the principles of accrual accounting.

1. Accrued Expenses
Definition: Accrued expenses are those costs that a business has incurred, for which it has not yet paid or recorded, by the end of the accounting period. Common examples include salaries payable, interest expense due, utilities, and rent.

Purpose: The primary purpose of recording accrued expenses is to adhere to the matching principle of accounting, which states that expenses should be recognized in the same period as the revenues they help generate.

Journal Entry: The typical entry for an accrued expense involves debiting the expense account to increase it and crediting a corresponding liability account to recognize the obligation.

Example: If a company owes two days of wages totaling $1,000 at the end of the month, but the payroll will not be processed until the following month, the entry would be:
Debit: Salaries Expense $1,000
Credit: Salaries Payable $1,000
2. Accrued Liabilities
Definition: Accrued liabilities are financial obligations that a company has incurred during a given period but has not yet paid or recorded. This term often overlaps with accrued expenses but can also include other types of liabilities like taxes payable or interest payable that aren't necessarily linked directly to the receipt of goods or services.

Accounting Treatment: Similar to accrued expenses, accrued liabilities are recorded by increasing the liability account without an immediate corresponding cash outflow.

Example: Suppose a company has incurred an interest expense for the month that has not been paid by the end of the period:
Debit: Interest Expense
Credit: Interest Payable
3. Adjusting Entries for Accrued Expenses and Liabilities
Adjusting entries for both accrued expenses and liabilities are made at the end of an accounting period to ensure that the expenses are matched with the revenues of the period and that all financial obligations are recognized.

Impact on Financial Statements:
Balance Sheet: Accrued liabilities are recorded as current liabilities, which increases the total liabilities reported.
Income Statement: Accrued expenses are recognized as costs, decreasing the net income for the period.
4. Reversing Entries
Some businesses use reversing entries at the start of the new accounting period to simplify the recording of future payments. This method is particularly useful when the payment of the accrued expense is expected in the next period shortly after being accrued.

Example of a Reversing Entry:
Debit: Salaries Payable $1,000
Credit: Salaries Expense $1,000
This entry would be made on the first day of the new month, reversing the original accrual and simplifying the process when the actual payment is recorded.

Conclusion
Accrued expenses and liabilities are critical for accurately presenting a company’s financial condition in its financial statements. By ensuring that these expenses and liabilities are appropriately recorded, companies adhere to accrual accounting principles, thereby providing a more accurate picture of their financial health and performance to stakeholders. Regularly managing and reviewing these accounts is essential for maintaining accuracy in financial reporting.




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